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KENT, WA- An alliance of apartment property operator JB Matteson Inc. and investment manager Griffin Capital Corp. recently made its first apartment acquisition, paying Equity Residential $32.4 million for Waterford at the Lakes, a 344-unit complex. Built in 1990, the 16-acre, 35-building development sits within the Lakes at Kent master-planned community, 15 miles south of Seattle and a few blocks north of the Riverbend Golf Complex.

The property was acquired with a 10-year, $25 million, fixed-rate first mortgage loan provided by Fannie Mae and underwritten by Wells Fargo. Griffin Capital chief investment officer Michael Escalante tells GlobeSt.com that given the uncertain nature of the economy the asset was underwritten at a 7% cap rate despite being acquired at 7.8% cap rate.

“Occupancy and rates have been pretty firm,” he says, “[but] there has been some backtracking so we’ve underwritten [more] concessions.”

This is Griffin’s first apartment asset in Seattle and likely won’t be the last. The property management company it uses, HSC Riverstone, already manages several assets in the market.

“We like the market in general,” he says. “I think people are generally high on Seattle and we share that view for the near term and over the next 10 years.”

The investment goal is an IRR in the low-to-mid teens. More importantly, Escalante says, is the fact that he doesn’t have to surpass his currently slow rent growth assumptions to achieve that. Value-add plans include a renovation of the complex’s clubhouse.

Equity residential, one of the largest apartment owners in the region, retained CB Richard Ellis SVP Jon Hallgrimson to sell the property. EQR typically sheds older product in favor of newer product. While Griffin and Matteson are typical buyers, they’re source of funds was atypical, he says.

“While many traditional real estate investors are having trouble raising equity in this market, JB Matteson and Griffin Capital looked to smaller investors, who are not often a source of equity for larger apartment sales,” Hallgrimson says.

As for the Puget Sound apartment investment market, Hallgrimson says there really isn’t much of one at the moment. Waterford is only the fourth or fifth significant apartment asset that has traded since late last year, most of them in the last couple of months. It’s a bid-ask problem.

“There are usually 40- to 45 complexes over 100 units trading annually,” he says. “Buyers are looking for 7- to 8% cash-on-cash or better while sellers, who were eyeing 5% cap rates not too long ago are loathe to take a 35% hit to value; they can’t stomach giving back all that equity.”

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